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New Saudi Arabian Companies Law

Corporate Alert

The Saudi Arabian Ministry of Commerce and Industry and Capital Market Authority confirm grace periods for joint stock companies to comply with specific provisions of the new Companies Law

The Saudi Ministry of Commerce and Industry (MoCI) and Capital Market Authority (CMA) have confirmed which provisions of the new Companies Law (the "New Law") applying to existing joint stock companies shall be subject to a one year grace period, ahead of the New Law coming into force on 2 May this year. The information was released by both entities in similar announcements yesterday (17 April).

Article 224 of the New Law provides that existing companies subject to the new law shall make such adjustments as are necessary to comply within one year of the law coming into force. The law will come into force 150 days after publication in the official gazette (Umm Al-Qura), which effective date (following such publication last year) will fall on 2 May 2016. Article 224 further provides that MoCI and CMA shall identify provisions to which a grace period shall apply.

The provisions for which the grace period is confirmed to apply under the announcements are as follows (with a brief description of what the provision does):

Article 68 (1) Regulates the number of board members for a joint stock company (not less than three and not more than eleven).

Article 186 Creates hierarchy between holding company provisions and other general company provisions in respect of holding companies.

The announcements further provide that Articles 90 and 95 (governing the calling of shareholder meetings by the board and election of directors respectively) shall apply immediately upon the New Law coming into force. Also, where companies take new steps for example to form an audit committee as contemplated under Articles 101 to 104 of the New Law or to appoint a new director under 68(1) of the New Law, these should be compliant with the New Law notwithstanding the grace periods above.

Companies and the shareholders are entitled to exercise all the rights set out in the New Law from its effective date, subject to relevant modification being made to their constitutional documents if needed. MoCI and the CMA also reaffirm their intention to publish draft implementing rules for consultation.

One issue attracting particular attention in the market is Article 150, which reduces the threshold loss, compared to the equivalent provision in the old law, which triggers a requirement for a joint stock company to capitalise or dissolve, from 75% to 50% of its paid up capital.

Knowledge of such losses starts a countdown to call an extraordinary general meeting which must then authorise a capital increase in the minimum requisite amount which must then happen, otherwise the company will be dissolved by operation of law. One particularly apocalyptic interpretation of this provision holds that the company simply ceases to exist as a legal person at this point, though our understanding is that is that is not the legislator's intent (notwithstanding a difference in wording from the old law); rather, the company would be liquidated. However, the consequences are ultimately terminal enough for companies caught by the changed threshold to give it their urgent attention, albeit there now appears to be confirmation of a grace period for existing companies.

Numbers of directors (now capped), remuneration for their services and the establishment of a functioning audit committee are also compliance issues affected by the new law about which all joint stock companies need to be aware (included closed (non listed) ones) are potential banana skins to be avoided.

We note the degree of intra-governmental coordination with same day, parallel announcements by the CMA and MoCI; something which reduces uncertainty and which will be welcomed by market participants.